LONDON, United Kingdom — From mass retailers to luxury boutiques, the fashion industry has a discounting problem. Customers have come to see big red price tags, discount codes and slashed prices as the norm. Retailers, eager to maintain a competitive edge, are all too happy to oblige.

Discount culture is a topic of great concern for the fashion industry. What started off as a quick-fix “band-aid” for excess inventory is no longer an effective solution to the challenges facing retailers today. Not only does it cause narrowing profit margins, but it also makes a lasting impression on the perceived quality of a brand and its products.

Retailers and customers alike have developed a markdown dependency. According to WGSN data reported by Quartz, almost 40 percent of “new” products in women’s stores were discounted as of the end of 2018, versus only 25 percent in 2017. J.Crew’s 2018 earnings further underscore the detriment of rampant discounting, with fourth-quarter gross margins at 22 percent, down from 37 percent a year earlier.

On April 3, BoF founder and CEO Imran Amed and chief New York correspondent Lauren Sherman held a live conversation with members of the BoF Professional community on the ways to tackle discount culture. Here are the highlights:

Case Study: Graanmarkt 13

Antwerp-based lifestyle emporium Graanmarkt 13 noticed its profit margins were shrinking due to end-of-season sales. In a bid to fix this, the company board voted to stop discounting products altogether.

The store immediately took a hit, losing 15 percent in sales, but has since bounced back and even saw an increase in profit margins from 43 to 52 percent. Not only is the company selling more at full price, they are doing so at a profit.

By choosing to primarily stock local designers, rather than widely available international brands, the store was able to maintain a competitive edge through unique inventory.

Creating Alternatives to Sales

Graanmarkt 13’s revised retail strategy didn’t begin and end with a blanket ban on discounts. In lieu of its usual end-of-season sales, the boutique devised a zero-commission consignment scheme. Customers can bring in any 10 items of their choosing and those selected by the store’s owners are bought in exchange for a gift card amounting to the resale price.

Presentation is also key; even if markdowns need to happen, they don’t have to be openly communicated. For example, an €800 cashmere sweater stocked at Graanmarkt 13 wasn’t shifting, so co-founder Ilse Cornelissens subtly tweaked the price tag down to €500. The technique has worked for several of its hard-to-shift products, but as a solution, it may not be scalable for larger retailers with a brick-and-mortar contingent.

Everlane’s “pay what you like” model, which offers three different price tiers for the same sale item, is another creative approach to markdowns. As expected, the majority of customers opted for the lowest price, but 5 percent of customers chose to pay more. Furthermore, the strategy created goodwill among customers, a valuable asset in the age of waning brand loyalty.

Managing Inventory

For luxury retailers in particular, maintaining exclusivity and/or scarcity can be a helpful way of ensuring that there is no excess inventory to liquidate at the end of the season. Intrinsic to this approach is brand storytelling and creating perceived value around a product. Gucci, which hasn’t discounted products since 2015, has profited off the back of this. Ralph Lauren has reaped the benefits of a similar strategy.

Conversely, large fast fashion or sportswear companies can benefit from quick turnovers due to broader and shallower inventory. Nike’s localisation strategy is another way to streamline product rollout and prevent excess.

Brands can introduce a core collection of products that are never going to go on sale, or in the case of retailers, stocking exclusive pieces are a competitive advantage.

Outlets are another useful — and environmentally sustainable — answer to excess end-of-line inventory. However, retailers should be careful not to create products exclusively for the outlet, which muddies revenue streams, or let stock overlap with current products, which cannibalises full-price collections.

Knowing the Customer

In the age of data, it’s easier than ever for retailers to profile customer behaviour and spending patterns. Blanket marketing emails announcing discount codes and deals offer an unnecessary incentive for customers with a history of paying full price. Similarly, repeat customers who buy a large volume of discounted products can be edged away from discount purchases if they are convinced that your products are worth the price tag.

Digitally native direct-to-consumer brands have strong acquisition tactics through first-time discount codes on their social channels, but these are rolled out in tandem with a strong sense of brand-building. Furthermore, the brands are typically young private companies looking for a strong exit in the not-too-distant future, so are less concerned about longevity or customer loyalty.

Point of No Return

For markets like the United States, where discount culture is particularly rampant, there is also a consumer behaviour of expecting no-questions-asked returns (see the urban myth of a customer successfully returning a tire to Neiman Marcus, which doesn’t even sell tires).

It’s important to bake returns into your plan if you want to maintain a competitive edge. This can be difficult for small independent stores, as a no-returns policy can make customers second-guess, but for retailers of all sizes, discounted items are an opportunity to refuse customer returns.

Key Takeaways

In order to tackle discount culture and its widespread impact, retailers have to actively make changes, but they can be rolled out incrementally. See for example Ralph Lauren, which is inching away from its wholesale model.

The nature of your strategic turnaround should also depend on which market you are operating in. Europe is typically more traditional in its structured end-of-season sales, whereas the US is the ground zero of discount culture.

Taking a step back from discounting will inevitably incur damage in the short-term. Be prepared for sales to take a hit as customers re-adjust to the reality of full prices.